The European Commission has proposed tougher transparency laws for tax planning intermediaries as part of the commission ongoing effort to tackle aggressive tax planning and in recognition of the role played by intermediaries in tax avoidance schemes as exposed by recent scandals.
If adopted, the rules will make it mandatory to report to the tax authority cross-border tax planning schemes bearing certain characteristics before these schemes are used. Details must be reported to the tax authority within 5 days of providing such arrangement to a client.
Some of the characteristics or “hallmarks” looked for include the use of losses to reduce tax liability, special beneficial tax regimes, or arrangements through countries that do not meet international standards.
The obligation to report is the responsibility of the intermediary who supplied it. In a statement the European Commission said the rule was comprehensive and covered all intermediaries such as tax advisors, accountants, banks and lawyers.
However Richard Murphy, professor of practice in international political economy at City University of London, talking to this magazine said that while he welcomed these changes the most important question was who is an advisor.
“The move seems to require European Union registration for multi-jurisdictional firms,” he said. “The days of networks pretending to be homogenous entities when it suits them, and fractured collections of independent firms for regulatory purposes, appears to be over and if this new regulation is to really work then this is an issue for the EU to address.”
Accountancy Europe CEO Olivier Boutellis-Taft noted welcomed the proposal suggesting that it could contribute to greater transparency and in turn support trust in society. However he expressed reservation on putting the obligation to report on the intermediary.
“What I [don’t think will work is] tax advisors being responsible to disclose tax schemes, while the taxpayer is better placed,” he said. “All players in the tax system (tax authorities, lawmakers, tax payers, intermediaries) need to take responsibility for improving it and work together.”
Under the EU Commission proposed rules, if the intermediary is not based in the EU or if the intermediary is EU-based but bound by professional privilege or secrecy rule the obligation then falls to the individual or company receiving the advice. If the cross border scheme is designed by in-house tax consultants or lawyers, the individual or company implementing it will have to report it.
EU Member States will automatically exchange the information through a centralised database on a quarterly basis which the Commission said would enable them to block harmful arrangements.
“The requirement to report a scheme does not necessarily imply that it is harmful, only that it merits scrutiny by the tax authorities,” the commission statements read. “However, member states will be obliged to implement effective and dissuasive penalties for those companies that do not comply with the transparency measures, creating a powerful new deterrent for those that encourage or facilitate tax abuse.”
BDO global head of tax Robert Aziz said that BDO agreed there could be benefits in a disclosure policy. “The main challenge is for regulators to ensure that such disclosure obligations consist of properly set criteria, which should not be too wide or too prescriptive,” he continued. “They should neither burden the reporting organisations unnecessarily, nor the tax authorities’ capacity to collect and use such information efficiently.”
Announcing the proposal, the EU Commission said that these new requirements will ensure an harmonised EU approach to implementing the recommended mandatory disclosure provisions in the OECD's Base Erosion and Profit Shifting (BEPS) project.
However Grant Thornton global leader of tax services Francesca Lagerberg said: “This patchwork quilt of different rules from different organisations can be confusing for businesses.”
While she recognises that the European Commission wants to play a more active role in trying to tackle issues thrown up by the Panama Papers, the Luxleaks and other big tax avoidance cases, Lagerberg said the commission has struggled to know where to play a part.
“The long running BEPS project for cross border activities has been well thought out but hasn’t all come to fruition yet. It would be good if the European body could work with that globally,” she said.
A study by the European Parliament estimated that tax avoidance costs public budgets €50bn to €70bn a year. While another study, commissioned by the European Parliament’s Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion, estimated €173bn was evaded or avoided through the Panama Paper schemes alone.
Member states such as the UK, Ireland and Portugal have already implemented mandatory reporting requirements for domestic intermediaries. The commissioned study said that the UK has opened civil and criminal investigations and announced probes involving nearly 1,300 taxpayers for potential tax evasion. The UK’s Finance Act 2016 introduced a new package of measures which increase civil penalties for offshore tax evasion, including the introduction of a new asset based penalty of up to 10%.
Lagerberg continued: “There is a lot to learn about what works and what hasn’t in the different member states so they [the EU Commission] need to take advantage of it and not recreate something that already exists. We want to make sure they don't come up with something difficult to administer for businesses or cuts into other rules.”
Commissioner for economic and financial affairs, taxation and customs Pierre Moscovici said: “Tax administrations should have the information they need to thwart aggressive tax planning schemes. Our proposal will provide more certainty for those intermediaries who respect our laws and make life very difficult for those that do not.”
The Commission proposals are now in the EU parliament for discussion and approval, the Commission however said it was confident the requirements will come into force by 1 January 2019.